RIO TINTO's Oyu Tolgoi copper mine, Mongolia, backed by a debt commitment and political risk insurance from World Bank affiliate, the IFC. The mine's tax structure is routed through a tax loophole in Holland. Photo: Rio Tinto

RIO TINTO's Oyu Tolgoi copper mine, Mongolia, backed by a debt commitment and political risk insurance from World Bank affiliate, the IFC. The mine's tax structure is routed through a tax loophole in Holland. Photo: Rio Tinto

 
 

Tom Butler: Advice is Worth
Less than Dollars

Issue 99, September 2014

Simandou, Rio Tinto’s controversial multi-billion tonne iron ore project in Guinea, will make it into production and transform Guinea’s economy, says Tom Butler, global head of mining at World Bank affiliate the IFC.

5 per cent owned by the IFC, two of Simandou’s four mining blocks have been subject to serial corruption enquiries and ongoing court action between Rio and Brazilian group Vale. Originally due for production in 2013, Rio now aims to begin mining in 2018.

The IFC’s investment has provided Rio and would-be lenders with “a lot more comfort”, Butler says, given the World Bank’s ability to mediate at a government level, such that its shareholding has kickstarted investment in Guinea, subject to a coup in 2008. 

Hard Dollars

“Advice is worth a lot less than hard dollars,” Butler tells Global Mining Observer. “The fact that we’re invested is something the government has also wanted to see.”

Cap-ex estimates top $10bn, with output of 95m tonnes per annum adding over 5 per cent to the seaborne iron ore market. At current prices the mine will generate annual revenue of $7.5bn and annual taxes for Guinea of over $1bn, according to IFC forecasts.

Simandou is held by Rio Tinto in an offshore vehicle, but Butler stresses the IFC’s stake is held at the Guinea level and rejects the suggestion, championed by former UN Secretary General Kofi Annan, that offshore ownership structures automatically lower disclosure standards for governments and investors.

“There are lots of reasons why companies structure holding companies offshore and we don’t make investments where it’s clearly an offshore tax minimisation strategy. In this case, we don’t feel uncomfortable at all."

Political influence is “absolutely one of the reasons” why companies partner with the IFC, he says, and whilst it does not offer “subsidised or soft money”, equity backing from the group is clearly a fillip for mining juniors, offering a path to debt funding once a project hits construction.

“From a company’s point of view, especially if it’s in a country where they think they may have difficulty raising the debt, it gives them comfort to know that they’ve got a shareholder who has the ability to underpin the debt if needed. Providing its bankable, we’ll put debt into the project in due course.”

IFC backing has allowed Toronto-listed Guyana Goldfields to “unlock” lending from Canada’s Scotiabank, Butler says, triggering a $185m debt deal for the junior announced last month. “We were a core part of that debt finance.”

Mongolia

The IFC has likewise approved debt funding up to $1.4bn for Rio Tinto’s Oyu Tolgoi copper-gold mine in Mongolia, expected to generate a third of Mongolia’s GDP by 2021. Whilst Rio’s tax rate is lowered by a holding structure routed through Holland, the company paid $220m in taxes to Mongolia in 2013, equal to 15 per cent of the country’s total tax base.

The mine is 34 per cent owned by Mongolia’s government and has passed over $500m through Mongolian suppliers, statistics Rio Tinto is at pains to emphasise. “What we see in emerging markets,” Butler says, “is that preserving a social license to operate is becoming more challenging, not less, so we think there’ll be continued need for us.”

The IFC invested $389m into mining, oil and gas in 2013, equal to 0.15 per cent of all capital raised by the mining sector as a whole, according to data from Ernst & Young. That figure and the IFC’s influence in the industry could rise considerably however. The World Bank is planning to double its firepower in the next 10 years, president Jim Yong Kim said in April.

Issue 100: BSGR: Simandou to reveal vote rigging by Guinea's President 

“We were a core part of that debt finance.”

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